As the countdown for the Union Budget 2006 has begun, one starts thinking of priorities for the finance minister. Here are some random thoughts. A major priority is to consolidate the industrial growth momentum. Some may argue that the Indian economy is overheated and it may be time for a fiscal consolidation. On the contrary, industrial growth has just revived after several years of recession and it needs to be consolidated. Past trends have confirmed the important role that public investment plays in sustaining industrial growth.
Hence, the FM needs to strengthen the recovery of industry by pumping more investments in infrastructure development, which would also enhance long-term sustainability of the growth and bring more of private investment and FDI. The compulsions of reducing the fiscal deficit need not constrain him. The targets such as 5% that the Bretton Woods institutions advocate are, at best, rules of thumb. Different economies have their own optimal levels for the deficit. Since inflation in India is currently under check, there is no reason to worry.
Another priority would be to give a broad strategic direction for facilitating India?s emergence as a competitive manufacturing hub for the world. Keeping in mind our need for generating jobs, we need to exploit the potential of export-oriented manufacturing, the way China has. Leaving aside the conventional export-oriented industries such as textiles, clothing, leather goods and gems and jewellery, Indian enterprises have very little presence abroad, except in pharma, automotives and components. In India, industry?s share in GDP is low and has actually gone down from 27.9% to 25.9% over the 1991-2002. China, on the other hand, derives more than half of its GDP from industry and expects the proportion to grow rather than decline over the next two decades.
Development of export-oriented manufacturing requires a combination of policies. These include promoting excellence in the domestic corporate sector. RIS studies find a wide variation in enterprise-level export performance within any industry. Obviously, enterprise dynamism has a role to play in export successes, besides other factors. Hence, policies should help in nurturing world-class enterprises or national champions in select sectors. These national champions could be assisted to grow to world-scale and compete worldwide with their own brands, acquisitions and whatever it takes. They could be selected on the basis of performance, professionalism, innovative and brand-building capability, and potential to emerge as the leading enterprises internationally. They could be assisted by various official bodies, for instance, by financial institutions for preferential access to funds for overseas take-overs and capacity expansion; assistance for major R&D, product development, brand-building and market development projects; support by Indian missions abroad for market information and investment opportunities, and leveraging the Exim Bank?s credit lines for securing market opportunities.
Second, RIS studies have emphasised the critical role of in-house R&D for strengthening enterprise competitiveness. In developed countries, governments spend billions of dollars in R&D subsidies for national enterprises to strengthen their competitiveness. Subsidies up to 50% of project costs are non-actionable under WTO rules. In India, R&D activity is mainly encouraged through weighted tax deductions and easy credits in certain industries. Direct R&D subsidies on specific projects for products or process development by domestic enterprises are desirable, as per the global trend.
• Pump money into infrastructure development, without fiscal deficit worry • Select ?champion? firms and help these compete on a global scale • Impose export obligations on MNCs, in return for access to our huge market |
Third, inward FDI policy needs fine-tuning to exploit the potential of export-oriented FDI. In China, for instance, FDI accounts for 55% of China?s manufactured exports and as much as 80% of high- technology exports. In India, this proportion is marginal, at 8-10%. Studies show that export-oriented FDI is driven by factors other than domestic market-seeking FDI. We need a combination of pro-active promotion, incentive structures and selective policies to prompt MNCs to make India a global or regional production hub. Here, our ability to offer access to a large and expanding domestic market, besides other resources such as low-cost but high-quality human resources, needs to be leveraged effectively for getting them to consider India as a base for export-oriented production. Countries like China have effectively bargained with MNCs on access to the domestic market in return for certain export obligations. RIS studies have shown export-obligations can be effective tools for promoting manufactured exports by MNCs in countries with large home markets, such as India. Such obligations are consistent with WTO rules. Such obligations could also be imposed on FDI in retail when opened, among other requirements.
While FDI needs to be promoted, the investment associated with foreign institutional investors (FIIs) in Indian stocks needs to be discouraged. With one of the best performing stock markets in the world, India is attracting increasing attention by FIIs. These investments, by their nature, are volatile hot-money inflows, seeking a quick buck from cyclical movements in the stock prices and currency speculation. Excessive exposure to them is undesirable, as it tends to build a bubble when they flow in, making it susceptible to a precipitous crash. These inflows also put upward pressure on the rupee, eroding the competitiveness of Indian exports. The FM could consider imposing a hefty transaction tax or an ?exit load? to moderate the instability brought in by them. These are flows we can do without.
The writer is DG, Research and Information System for Developing Countries (RIS). These are his personal views
